Tramtrack Croydon Ltd v London Bus Services Ltd [2007] EWHC 107 (Comm)

[2007] EWHC 107 (Comm)Case No 2005 FOLIO 583
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 31/01/2007
Before
MR JUSTICE CHRISTOPHER CLARKE
Between
TRAMTRACK CROYDON LIMITEDClaimantLONDON BUS SERVICES LIMITEDDefendant
Mr Richard Wilmot-Smith QC & Mr Sean Wilken (instructed by Ashurst) for ClaimantMr Stephen Males QC & Mr Thomas Raphael (instructed by Field Fisher Waterhouse) for DefendantHearing Hearing dates: 3 rd- 9 th October 2006
Judgment
[1]Tramlink Croydon Limited (“TCL”) holds the concession to run the Croydon Tramlink. The agreement that now governs that concession is the Amended and Restated Concession Agreement (“ARCA”) of 29th June 2000 made between TCL and London Regional Transport (“LRT”) Sometimes referred to as “LT”. . London Bus Services Ltd (“LBSL”), the defendant, is LRT’s successor. Under clause 23 of ARCA TCL must accept certain tickets and passes as valid on the Tramlink and also such “additional tickets and passes” as are specified by the Regulator (now the Mayor of London) from time to time. In respect of such tickets or passes clause 23.3 provides that:
“..the parties shall in good faith agree (acting reasonably) the financial arrangements to be put in place to compensate [TCL] for the introduction of such tickets and passes”
Clause 75 of ARCA is an expert determination clause.[2]The Regulator has specified additional passes. One of those is the Bus Pass which TCL is now required to accept on the Tramlink At the time of the hearing a Bus Pass for a day cost £3.50, giving unlimited travel on bus and tram, compared with a single fare of £1.50 and £3 return. A weekly pass was £11. . In respect of these and other passes the parties have agreed interim payment arrangements pending the final resolution of their dispute. They are in disagreement as to how they, and the expert, if need be, are to approach the question of reaching or determining an agreement under clause 23.3 and, in particular, as to the status of a Side Letter dated 21st November 1996 given by LRT at the time of the original Concession Agreement of that date. There is also a subsidiary dispute as to whether certain passes are additional tickets or passes. The history[3]The Croydon Tramlink, established under powers given to LRT by the Croydon Tramlink Act 1994 (a private Act), was one of the earliest projects under the Private Finance Initiative (“PFI”). It combines public and private finance. Negotiations for the concession began in the middle of 1995 when LRT invited tenders In the Official Journal of the European Union. to pre-qualify for the construction and operation of the link. In October 1995 four consortia were formally invited to submit a tender, of which TCL was one. The TCL consortium was then comprised of(i) Sir Robert McAlpine Ltd and Amey Construction Ltd as the Construction Joint Venture;(ii) CentreWest as the intended operator;(iii) Bombardier Eurorail as the intended tram supplier; and(iv) Royal Bank of Scotland as proposed funder In the event funds were provided by a banking group of RBS, Dai-Ichi Kangyo and Bayerische Landesbank with 3i supplying mezzanine funds (and becoming a shareholder). .[4]LRT provided an Information Memorandum, which explained:(a) that section 2 of the London Regional Transport Act 1984 (“the LRT Act”) placed a general duty on LRT to provide or secure the provision of public passenger transport service for Greater London;(b) that the Concession Agreement would be an agreement under section 3 (2) of the LRT Act, which entitled LRT to enter into agreements with third parties to carry on activities which LRT itself has power to carry on, such as the provision of public transport services; and(c) that under section 8 of the LRT Act LRT had a duty to determine the level and structure of fares to be charged, the structure of the route and the level of provisions to be made with respect to the frequency of operation of the service on Tramlink;(d) that the Concession Agreement would oblige the Concessionaire to accept certain tickets and passes for travel on Tramlink which would include travelcards, concessionary passes, police passes and London Transport and Tramlink’s own staff passes.[5]The Memorandum made plain that the Concessionaire’s revenue from the project would come from three main sources:(a) passengers who would pay cash for a ticket which they would buy from the Concessionaire By the passenger putting his money into the tram ticketing machine. At the time of the hearing the cost for an adult was £1.50 per journey and £3 for a return. ;(b) passengers who would purchase Travelcards Travelcards entitle the holder to unlimited journeys on all bus, tram, and rail services (save to/from Heathrow) within a six zonal system. They apply for varying periods, zones and travel times (On/Off Peak). All Travelcards with validity for zone 3 are valid on Tramlink. , in which case payment would be made in accordance with an agreement called the Off Tram Revenue Agreement (“OTRA”) to which the Concessionaire would become a party; and(c) some passengers would be entitled to free concessionary permits in which case payment would be made by local authorities The London Boroughs issue concessionary permits to eligible persons (e.g. men and women over the age of 65/60, and disabled or blind people) to travel free. They make a payment to LRT of an amount equivalent to the revenue that would otherwise have been generated if no such passes had been issued. to LRT which would pass on to TCL Tramlink’s share of such revenue under OTRA (see paragraph 22 below).[6]The Memorandum gave an estimate as to how the Tramlink ridership and the revenue therefrom Sometimes referred to as the “Fares basket” or the “Fares box”. would be divided as follows: Division of ridership Travelcard 48% Cash fares 30% Concessionary permits 22% Sources of revenue Cash fares 43% Travelcards 38% Concessionary permits 19% The percentages adopted by TCL in its “Base Case Financial Model” (“BCFM”) were broadly similar.[7]Tramlink opened on 10th May 2000. Thereafter the actual breakdown of ridership and revenue figures as between the three types of customer differed from the LRT estimate. Passengers paying in cash have always represented a minority of TCL’s passengers and the revenue from those passengers a minority of revenue. Cash fares have never exceeded 28.6% of revenue. As can be seen from the above table the revenue per journey was estimated to be higher for cash fares than Travelcards or concessionary fares and, in relation to adults, that has in practice always been the case. The Concession Agreement (“CA”)of 21st November 1996[8]Clause 3.1 of the CA obliged TCL to develop, finance, construct, operate and maintain the Tramlink System, and to do so at its own risk and (save as expressly provided) without recourse to LRT, Government or other public funds or guarantees, then or in the future.[9]By clause 3.2 TCL was throughout the Concession Period of 99 years Subject to some provisions for earlier termination. to comply in full with, amongst other things, the CA, the Off-Tram Revenue Agreement and the Performance Specification.[10]Clause 4.1 dealt with Risk Allocation. Clause 4.1 (h) provided that TCL would assume the risks arising from “legal and regulatory requirements and approach”.[11]Clause 5.1 acknowledged that it was LRT’s duty under section 8 of the LRT Act to determine the level and structure of fares to be charged and the level, structure and frequency of services provided under agreements such as, and including, the CA.[12]Clause 23.1 of the CA provided: “While this agreement continues to be an agreement which is subject to section 3 (2A) (a) of the LRT Act and/or [LRT] continues to be under a statutory duty to determine the general level and structure of fares to be charged on the Tramlink System, [LRT] shall determine the said level and structure of fares and [TCL] shall charge fares and make available tickets in accordance with the level and structure so determined by [LRT] from time to time. “[13]Clause 23.3 provided: While this agreement continues to be an agreement which is subject to section 3(2A)(a) of the LRT Act and/or the Corporation continues to be subject to a statutory duty to determine the general level and structure of fares to be charged for public passenger transport services provided by or under contract to it in Greater London, the Concessionaire shall accept as valid for travel on the Tramlink System the passes and ticketsspecified in the Off-Tram Revenue Agreement and/or set out in the Performance Specification and such additional tickets and passes as are specified by [LRT] from time to time.” (bold added).[14]Clause 23.5 provided that subject to the Off-Tram Revenue Agreement, TCL would have the sole right to revenue in addition to the receipt of fares arising out of the operation of the Tramlink system during the Concession Period.[15]Clause 35.1 contained an acknowledgement by TCL that it had prior to the date of the agreement delivered to LRT its Financing Plan and that the Equity Investment invested or to be invested by its shareholders in TCL pursuant to the Finance Agreements reflected that Financing Plan (the BCFM). Mr Heath, the Project Manager of LRT initialled that document but made clear that he was not thereby endorsing the contents of the model.[16]Clause 37 provided for payment of public money to TCL up to a maximum of £ 98.35 million, Fares Compensation[17]Clause 41 of the CA provided for compensation to be payable by LRT to TCL in the event that the overall level of fares charged by LRT did not increase in line with certain assumptions (linked, broadly, to the rate of inflation). Compensation was to be paid in accordance with a complicated Fares Compensation Formula (“FCF”). Such compensation was only payable:(i) in the event that the overall level of fares to be charged by LRT during the first twenty years of the Concession Period did not increase at the rates anticipated; and(ii) for those first twenty years i.e. until 2016. The FCF had been the subject of careful negotiation in which TCL had tried but failed to persuade LRT that the formula should be linked to fare rises in the Outer London suburban area. The formula also provided that, if LRT’s overall level of fares exceeded the assumed rate, TCL would make a payment to LRT. Bus Related Events and Stored Value Tickets[18]Clause 44 of the CA provided for compensation to be payable by LRT to TCL in certain events including:(a) “Bus Related Events”; and(b) the “Introduction of SVT”. A “Bus Related Event” was either a failure by LRT to procure that specified “Competing Bus Services” These were the services that TCL thought would be the most damaging to it. It would have preferred that compensation should extend to a wider range of bus services. ceased operating by three months after the “Actual Opening Date” or the introduction or reinstatement of such services at any time during the period commencing on that date. “The Introduction of SVT” meant the introduction, at LRT’s request, of Stored Value Tickets (which are either Oyster cards or something similar There is a dispute as to whether Oyster cards truly come within the definition. ) on the Tramlink system. In the case of both Bus Related Events and the Introduction of SVTs LRT had to compensate TCL for the “Financial Impact Sum” i.e. the amount by which TCL’s “Net Operational Revenues” were less than they would have been during the relevant period but for the occurrence of the Bus Related Event or the requirement to accept SVTs.[19]By Clause 44.2 LRT’s obligation to pay compensation in relation to Bus Related Events was to terminate on 21st November 2006. The obligation to pay compensation in relation to the Introduction of SVTs was to last for the Compensation Calculation Period which was to end on the 20th anniversary of the Concession Award Date, being the date when all the conditions precedent to the CA had been satisfied. Clause 44 specified other “Compensation Events” requiring payment of the Financial Impact Sum i.e., for the most part, the loss of Net Operational Revenues suffered by TCL as a result of the event in question. Clause 44.3 provided that LRT would compensate TCL in respect of Stored Value Tickets by paying the Financial Impact Sum i.e. the amount by which for each relevant period TCL’s Net Operational Revenues were less than they would have been but for TCL being required to accept such tickets on Tramlink; and Clause 44.5 provided for account to be taken of a number of matters in calculating that sum.[20]Clause 48 provided that the Compensation payable under clause 44 was to represent “the sole entitlement of [TCL] to compensation in relation to the circumstances constituting the relevant Compensation Event” and TCL was to have no other rights or remedies, and LRT no other liability to TCL, “whether under this agreement or at law”, in respect of such circumstances.[21]Clause 73 of the CA provided:
“73.4. Each of the parties warrants and confirms to the others that it has not entered into this agreement in reliance on, nor has it been induced to enter into this agreement by any representation, warranty or undertaking made by or on behalf of the other (whether express or implied by statute or otherwise) which is not set out in this agreement. 73.5 This agreement and the documents referred to in it contain the whole agreement between the parties relating to the subject matter of this agreement and supersede all previous agreements between the parties relating to that subject matter.”
[22]Clause 75 provided that “any dispute, failure to agree or other difference” between the parties under the agreement should be referred to expert determination in accordance with the provisions of Schedule 13 which provided for the appointment of such an expert and a dispute resolution procedure.

The upshot of the CA and the LRT Act

[23]The effect, therefore, of the LRT Act and the CA was that LRT had a statutory duty to determine the level and structure of fares to be charged for travel on Tramlink. It was contractually entitled to specify “additional tickets and passes”, which TCL was required to accept. The exercise of LRT’s powers in this respect was likely to have an impact on TCL’s revenues from the Tramlink system. That was a risk that TCL took. Save in respect of SVTs, the agreement contained no provision by which TCL was entitled to compensation for the introduction of additional tickets and passes. The FCF only dealt with headline rates and none of the Compensation Events apart from the introduction of SVTs related to additional tickets and passes. The Performance Specification[24]Clause 2.2 of the Performance Specification provided that the Tramlink System would operate as an integral part of the public transport network in Greater London.[25]Section 10, clause 1.1. provided that: “The Concessionaire shall conform with London-wide zonal ticketing systems, Travelcard (or its equivalent) and concessionary fares (as described in the [CA]. [LRT] shall determine the level and structure of fares to be charged on the Tramlink System in accordance with clause 23 of the [CA]. The Concessionaire shall accept Travelcards, LT Cards, Concessionary Permits (acceptance on Mondays to Fridays shall be only after 0900 hours), LT Staff Passes and Police Passes and any other multi-modal tickets whose format and nature are determined by [LRT]”.[26]Section 12 contained a glossary which included the following definitions “LT Staff Passes means the passes issued to Eligible Employees, their spouses, dependants and children, evidencing their eligibility for discretionary facilities primarily on rail and/or bus services operated or procured by [LRT] and, for these purposes, Eligible Employees means eligible current and former staff of the Corporation and any of its current or former subsidiaries; Police Passes means the passes, identification card or warrant card issued to any constable of any of Her Majesty’s Police Forces.” The Off-Tram Revenue Agreement (“OTRA”) of 25th November 2006[27]OTRA contained provisions for sharing out the total revenue obtained from(a) Travelcard purchases; and(b) Local Authorities in respect of concessionary fares. Clause 2.1 obliged LRT to pay to TCL Off-Tram Revenue. TCL’s entitlement to such revenue was to be determined pursuant to Schedule 1. So far as Travelcards are concerned Schedule 1 provided that TCL was to have allocated to it the amount reached by multiplying the appropriate Travelcard Rate by the passenger kilometers traveled under travel cards on Tramlink There are different rates for One-Day Travelcards and Period Travelcards (valid for a week). Originally the rates were 9.35 and 11.22 pence per passenger kilometer. At the time of the hearing TCL received £0.1514 per passenger kilometer for off-peak travel on the One Day card and £0.1452 for on-peak travel on that card and for travel on all cards valid for a longer period. There is an agreement between the parties that the number of kilometers travelled per passenger per Travelcard journey is 5.2. . In respect of Concessionary Permits TCL was to receive the share of the revenue received from local councils which was attributable to the use of Tramlink by concessionary travellers. The aim of this formula was to produce a fair distribution of revenue received under these two heads on the basis of passenger usage. Fares Revenue (defined as the revenue attributable to travel on the Tramlink System using Concessionary Permits as determined in accordance with Schedule 1) and the Travelcard Tram Revenue (defined as the aggregate of One Day Travelcard Tram Revenue and Period Travelcard Tram Revenue as calculated in accordance with Schedule 1).[29]Clause 5 dealt with SVTs. Clause 5.2. provided that TCL should: “negotiate in good faith with [LRT] to agree any amendments to this Agreement … required in connection with any material changes in Off-Revenue Schemes including (without prejudice to the foregoing generality) in particular the introduction of Off-Revenue Schemes incorporating the use of(i) Stored Value Tickets or(ii) electronic pass recognition systems” “the arrangements described in this Agreement relating to Off-Tram Revenue and any other arrangement made by [LRT] with other transport operators relating to revenue attributable to travel on modes using Concessionary Permits and/or revenue attributable to the sale of Travelcards”.[31]Travelcards were defined as “tickets identified as such and available for use, inter alia, within the Zones on services operated by [TCL].”[32]The combined effect of the definitions of Off-Tram Revenue, Off-Revenue Schemes and Travelcards is that Clause 5.2 obliges negotiation in respect of amendments to OTRA required in connection with material changes in the OTRA arrangements relating to Concessionary Fares Revenue and Travelcard Tram Revenue (i.e. revenue from tickets identified as Travelcards) The consequence of applying these definitions literally isthat the introduction of a Stored Value Ticket, which is cited as a specific example of a possible change to an Off Revenue Scheme, is not a material change in an Off-Revenue Scheme unless such a ticket is “identified as a Travelcard”.The parties probably did not intend such strictness. . The Side Letter[33]During the negotiations leading up to the CA TCL was concerned that the exercise by LRT of its statutory powers and duties in relation to fares could prejudicially affect its revenues. So it sought contractual commitments from LRT in relation to(a) the setting of fare levels,(b) the provision of bus services which would dovetail with Tramlink’s timetable (bus feeder services);(c) competing bus services and(d) service levels.[34]A corporation which has statutory powers and duties cannot validly contract not to exercise those powers, or only to exercise them in a particular way. For that reason LRT refused to enter into the contractual commitments sought. It was, however prepared to deliver a non binding Side Letter indicating how it currently carried out its duties. In the end TCL reluctantly agreed to accept this, save that, in relation to competing bus services, it held out for a contractual provision, and, as a result, secured the “Bus Related Event” compensation provision.[35]On 17th May 1996 Freshfields, LRT’s solicitors, wrote a note on outstanding issues, which they sent to Ashurst Morris Crisp (“AMC”), TCL’s solicitors. This included the following paragraph: “11. LT Behaviour TCL requires compensation for loss of revenue which results from LT exercising statutory duties in relation to:(1) the failure to remove and/or the re-introduction of competing bus services (in line with the indications given in the Information Memorandum);(2) requiring the Concessionaire to reduce service levels beyond the levels specified in the Performance Specification; and(3) requiring the Concessionaire to reduce fares below the Fares Table The Fares Table was a rate in pence per passenger kilometer for various years specified in Schedule 6 of the CA. That rate was consistent with the Base Case Financial Model. By the time that Tramlink came to operate the fares fixed were not consistent with the Fares Table. By then LRT had decided on a flat rate (and not a graded) fare structure and an increased difference between the flat fare and the bus fare. . LT’s ability to give comfort on each of these areas is constrained by its statutory duties. The extent of comfort it is able to give is described in the draft Side Letter already distributed. “ TCL requires compensation for loss of revenue which results from LT exercising statutory duties in relation to: (1) the failure to remove and/or the re-introduction of competing bus services (in line with the indications given in the Information Memorandum); (2) requiring the Concessionaire to reduce service levels beyond the levels specified in the Performance Specification; and (3) requiring the Concessionaire to reduce fares below the Fares Table The Fares Table was a rate in pence per passenger kilometer for various years specified in Schedule 6 of the CA. That rate was consistent with the Base Case Financial Model. By the time that Tramlink came to operate the fares fixed were not consistent with the Fares Table. By then LRT had decided on a flat rate (and not a graded) fare structure and an increased difference between the flat fare and the bus fare. . LT’s ability to give comfort on each of these areas is constrained by its statutory duties. The extent of comfort it is able to give is described in the draft Side Letter already distributed. “[36]In a position paper of 24th May 1996 LRT’s position was stated to be:
“LT is operating in a statutory environment created by section 3.2. of the [LRT Act] which was not intended for PFI projects. The Side letter was the best position which LT could offer to TCL to deal with these constraints. It was accepted that the provisions taken “cold” appeared unattractive but that they should be acceptable to persons operating with knowledge of dealing with the business i.e. it was necessary to, at a certain level, rely on “faith” in LT rather than contractual provisions”
. The negotiations leading to the Side Letter[37]The first draft of the letter had been provided by Miss Valerie Chapman (now Mrs Boomla), LRT’s principal in-house solicitor on the Tramlink project, in a letter of 3rd May 1996 to Mr Mark Elsey, a partner of AMC. This followed a meeting shortly before. It contained no reference to passes or new tickets. That issue did not arise until about July 1996.[38]On 8th July 1996 Mr Elsey put in manuscript on the then draft of the CA against clause 23.3. which then read:
“23.3. The Concessionaire shall accept as valid for travel on the Tramlink System the passes and tickets specified in [OTRA] and/or set out in the Performance Specification and such additional tickets and passes as are specified by [LRT] from time to time” 38. the words: “Presumably – these additional tickets and passes would need to be within the scope of the Off-Tram Revenue Agreement as suitably amended”
The LRT side had this document - as appears from an annotation made on it by Mr Perry Noble, the partner at Freshfields dealing with the matter.[39]On 11th July there was a lawyers meeting at Freshfields, which was attended by Mrs Boomla. On that date Mr Elsey listed on the 8th July document a list of different types of ticket or pass “1. Specified Day one. 2. Off-Tram Revenue. 3. Police etc passes. 4. London/area wide tickets.” and added the comment “LT to specify list”. This note was given to LRT.[40]On 19th July Freshfields sent to AMC a revised draft of the CA reflecting the results of the lawyers’ meeting and subsequent consultations that Freshfields had had with LRT. Mr Kendall, the then Project Manager of TCL, saw that draft. The draft indicated that where issues were outstanding they were indicated by footnotes. A footnote to clause 23.3 read:
“LT will confirm in the Side letter to TCL that tickets and passes introduced after signature will be for cash fares, covered by the Off-Tram Revenue Agreement or TCL will be reimbursed by LT or other persons”
. This note reflected the existing sources of revenue (Cash, Travelcards and Concessions) and became, with some changes Notably the introduction of the phrases “be introduced by LT on Tramlink and local buses at the same time “ after “be covered by the off-tram revenue agreement” and “if the tickets are free to users” between “or” and “paid for by LT or other persons”. The reference to tickets is likely to be a mistake. In 1996 there were no free tickets although there were free passes – for (a) police, etc and (b) the elderly and disabled; although in relation to the latter the term Concessionary Permit was usually used. , the wording of the relevant paragraph of the Side letter (see paragraph 42 below).[41]On 1st August 1996 Mr Elsey sent to the solicitors for the banks, the banks themselves, and AMC, a version of the Side Letter which incorporated, for the first time, a paragraph about new tickets and passes. The content of this paragraph was (save for the fact that it omitted the word “as” before “cash fares”) identical to the final version. The version that he enclosed has Mrs Boomla’s footer but it is not clear who the draftsman of the paragraph was. Mrs Boomla did not think that it was herself, so it was probably Freshfields.[42]The Side Letter, as executed, was dated 21st November 1996 and signed by Mr Clive Hodson, an LRT Board member. It dealt with the setting of fares, the alteration of bus services in the area within which Tramlink would operate, feeder bus services and how LRT intended to exercise its duty to set the service levels for Tramlink. It included the following:
“LT is able to give the following indications as to how it currently exercises its duties under the LRT Act …………………………………………………………………………… New Tickets and Passes If, after signature of the [CA], LT introduces new tickets and passes which it requires the Concessionaire to accept as valid for travel on the Tramlink system, it agrees that such tickets and passes will be paid for as cash fares, be covered by the Off Tram Revenue Agreement, be introduced by LT on Tramlink and local buses at the same time, or if the tickets are free to users be paid for by LT or other persons.”

New Tickets and Passes

[43]The provision of the Side Letter was one of the conditions precedent to the agreements between the banks and 3i and TCL.[44]The upshot of the negotiations was, therefore, that TCL became contractually bound under the CA to accept whatever additional tickets and passes LRT might specify and had, in terms, no legal right to compensation. Nor did the CA contain any mechanism for the agreement or determination of any compensation. But TCL had the benefit of an indication in a non legally binding Side Letter that any such tickets and passes would be paid for. Events after 1996[45]The first section of the Tramlink opened on 10th May 2000. The system as a whole opened to the public on 17th July 2000. In June 2000 the CA was replaced by the Amended and Restated Agreement. ARCA came about as a result of a number of matters, of which the most significant are those set out below.[46]Firstly, the headline rate in the Fares Compensation Formula was a blended mix of the fares available on all modes of transport throughout Greater London. That rate had increased in accordance with (in fact to a slightly greater extent than) the assumptions. But this had been achieved by larger increases in Central London and a holding down of fares in Outer London. TCL wanted to amend the formula so that the benchmark should be the fares on Tramlink alone: a change estimated to be worth nearly £1,000,000 a year to TCL on 2000 figures.[47]Secondly, the Greater London Authority Act 1999 (“GLAA”) practically abolished LRT’s operations Save that in June 2000 the deal for public/private partnerships on the Underground was incomplete. Until it was (in about April 2003), London Underground Ltd remained as LRT’s only operating subsidiary. . The GLAA imposed on the Mayor of London the duty to set the general level and structure of fares, which were to be administered by a new body called “Transport for London” (“TfL”) whose duty was to assist him. LRT’s functions were to be split: inter alia part of them was to go to LBSL and part to a company called Transport Trading Ltd (“TTL”). Others went elsewhere.[48]The relevant sections of the Act were to come into effect on 3rd July 2000. LBSL was to succeed, as in the event it did, to LRT’s rights and obligations under ARCA pursuant to a Transfer Scheme dated 23rd June 2000. At the same time TTL and LBSL became subsidiaries of TfL. One purpose of the ARCA was to take account of these changes.[49]Thirdly, passengers travelling from New Addington to Croydon, who would previously have bought a single bus ticket, needed, following the closure of some bus services which would have been competing with the tram, to travel by bus and tram and to purchase two separate tickets. The cost of these, in combination more than the previous single bus journey, LRT regarded as unfair. ARCA[50]ARCA was entered into on 29th June 2000. The principal relevant changes were these:a. Clause 5 (the acknowledgement of LRT’s statutory obligation) was deleted;b. Clause 23 was replaced by the following: “23.1. While this Agreement continues to be a Regulated Agreement, the Regulator shall determine the general level of fares to be charged on the Tramlink System and the Concessionaire shall charge fares and make available tickets in accordance with the level and structure so determined by the Regulator from time to time. 23.3 While this agreement continues to be a Regulated Agreement, the Concessionaire shall accept as valid for travel on the Tramlink System the passes and tickets specified in the Off-Tram Revenue Agreement and/or set out in the Performance Specification and such additional tickets and passes as are specified by the Regulator from time to time. In respect of any tickets or passes specified by the Regulator or otherwise the parties shall in good faith agree (acting reasonably) the financial arrangements to be put in place to compensate the Concessionaire for the introduction of such additional tickets or passes.” (bold added) (bold added)c. Clause 41 varied the Fares Compensation Formula as requested by TCL A change which Mr Dorey characterized as a matter of “survival” for TCL. One estimate was that the change would mean TCL receiving £900,000 per annum as opposed to paying £40,000 (since if the LT headline fare rate exceeded the assumed rate, TCL had to pay LRT). .[51]As is apparent, Clause 23.3 of ARCA introduced for the first time as part of the contract an obligation on both parties to negotiate the financial arrangements to compensate TCL for the introduction of additional tickets or passes.[52]At the same time the parties amended OTRA (which became an agreement between TTL and TCL) so as to include(a) One Day Tram and Bus Passes and(b) Feeder Bus Tickets. I refer to these below. Bus Passes come in[53]On 18th December 2003 LBSL notified TCL by letter that as from 4th January 2004 it was required to accept Bus Passes on Tramlink, and proposed that LBSL and TCL enter into an agreement to provide for the financial arrangements to compensate TCL for their introduction on Tramlink. The letter indicated that LBSL proposed that the agreement would provide for TCL to be compensated so that its revenue for trips made on Bus Passes would be no worse than it would have been in their absence. Negotiations preceding ARCA[54]ARCA was the product of substantial negotiations. These negotiations involved, on the part of TCL: Mr Robert Dorey, its then Chairman, Mr Ian Kendall (until August 1999) and Mr Brian Johns (from August 1999), its Project Directors, and Mr Robert Harding, TCL’s general manager. Those involved on the part of LRT included Mr Clive Hodson, a director, and Mr Clive Bradberry, the Project Manager, who took over from Mr Heath in around January 1997.[55]The negotiations are of significance for four reasons. Firstly, at the beginning of the negotiations (in a letter of 5th July 1999) TCL expressed the view that the Side Letter gave TCL an entitlement to cash fares for new tickets and passes. Secondly, Mr Bradberry and others at LRT, including Mr Hodson, then believed that that was indeed its effect. Thirdly, Mr Bradberry believed or hoped that the effect of agreeing ARCA and its amendment to clause 23.3 would be to “overcome” the Side Letter. Fourthly, no one said to TCL that the Side Letter was not to have effect or was to be replaced or abrogated by the amendment to clause 23.3.[56]Mr Bradberry was asked this question: Q And so it was that whenever there were discussions between LT and TCL, either written or at meetings, and TCL said, as occasionally they did, that the side letter gave them an entitlement to cash fares for new tickets and passes, nobody ever said:
“No, no, that’s not what the side letter means.”
A. Not that I’m aware of. Not at any meetings or correspondence that I saw, is all I can say.[57]The question posed of Mr Bradberry was a multiple one and I am not persuaded that his answer should be regarded as sound evidence that, in addition to the letter of 5th July 1999, there was a series of meetings at which TCL repeated their point on the Side Letter. There was certainly one two days later – on 7th July 1999 - where the notes record, in relation to Feeder Buses, that: “TCL pointed to LT’s statement in the letter of comfort concerning new tickets being paid for as cash fares[58]There is no documentary record of the point arising at any later meeting, and in particular any such meeting after Mr Bradberry’s reply, by a letter of 10th August 1999 (see paragraph 70), to the letter of 7th July. Mr Johns’ evidence, which I accept, was that:
“A. As part of the negotiation the side letter just did not figure in the negotiation, certainly from the time that I took over responsibility in August 1999. Q Well, it did not figure in the negotiations except where we have looked at it. A. No, it did not figure in the negotiations. I understand that it was a point that was raised in correspondence from Ian Kendall, my predecessor, to London Transport. From there on both parties were silent on the side letter. As far as I can recall, neither TCL nor London Transport commented on the side letter again, and it certainly was not in our mind when we reached the agreement for the ARA.”
The detail of the negotiations[59]There was an internal meeting at LRT on 14th September 1998. One of the matters under discussion was the possibility of extending the validity of Bus Passes to Tramlink. A note of the meeting records:
“In the light of the Comfort Letter of 21/11/96, it was likely that TCL would view Bus Pass Acceptance on Tramlink as being a “new ticket”, and expect Bus Pass journeys to be compensated for “as cash fares” without adjustment for trip generation. LT’s preferred option is for TCL to be reimbursed at current contracted Travelcard rates, or to reimburse TCL to a level which would leave them no better or worse off than they would have been without Bus Pass acceptance”
[60]In the event LRT decided in December 1998 not to introduce Bus Passes on the tram.[61]At an internal LRT meeting on 2nd February 1999 attended by Mr Dick Halle, the strategy director for London Buses, Mr Bradberry, Mr Chandler Stewart (Mr Bradberry’s operations analyst), Mr Richard Parry, and Mr Malcolm Fairhurst (who was part of LT Marketing), the view was expressed, and recorded in a note, that the new FCF should:• “ replace the side-letter guarantee regarding off-bus tickets with a more general “no better-no worse condition”[62]On 16th February 1999 Mr Parry sent Mr Hodson that note under cover of a memorandum which said:
“Our main conclusion was that: • we support the proposed amendment to the [FCF] to reflect Tramlink fares changes; • we should use this opportunity to place clear responsibility for Tramlink fares and ticketing policy with LT, notably to replace the side letter with its guarantees concerning new tickets with a “no better and no worse” condition.”
[63]By May 1999 the proposal that Tramlink should accept Bus Passes had re-appeared. In a memorandum to Mr Hodson of 13th May Mr Parry noted that, in that event, TCL might claim reimbursement pursuant to the Side Letter at a level equivalent to a cash fare, but that agreement of an FCF favourable to TCL would have to be linked to acceptance of Bus Passes.[64]By June 1999 LRT had decided that a One Day Tram and Bus Pass would be introduced. despite TCL’s reluctance to accept one until after Tramlink opened. An LRT paper of 25th June 1999 comparing positions included the following: Item LT position TCL position Comment 6.0 Fares 6.1. ….. Introduction of a One Day Tram/Bus Pass priced Between £ 2.70 to £ 3.00 More than a Bus card; less than a Travelcard. The pass was to be available in Bus Zones 2-4 which cover most of the Tramlink area. and available before 0930 IWK [Mr Kendall] has said that TCL would require Travelcard reimbursement rates for a new Tram/Bus Pass 6.2 LT Marketing would like to have a more equitable Tram/Bus Pass. Currently there is the statement in a letter of comfort to the effect that LT will compensate TCL for new tickets on a cash fares basis Although TCL have not raising (sic) the issue of the letter of comfort, it will look to get a Change Order for any new specified tickets and then claim costs LT Solicitors have already confirmed that LT do not need to issue C.O.[65]In a letter of 2nd July 1999 Mr Bradberry told Mr Kendall that LRT had decided against going ahead with the Bus Pass proposal but did intend to go ahead with the One Day Tram and Bus Pass proposal, priced at a premium above the One Day Bus Pass, and that LRT and TCL would need “to discuss the detail of the settlement arrangements for this new product”.[66]By a letter of 5th July 1999 Mr Kendall, on behalf of TCL, put forward a number of proposals described as “wherever possible taken from concepts and principles agreed in the [CA] and/or [the Side Letter]”. He expressed the view that the new through tickets then proposed (the “Feeder Bus Through Ticketing/Tram to Bus Pass”) were covered by the Side Letter, that LRT’s proposals were at odds with that, said that “LT must deliver to TCL 100% of the cash fare which is established for the through bus and tram service” and invited “reconfirmation of the [Side Letter] provisions for cash payment as such are critical to TCL not requiring further undertakings”.[67]TCL never got that confirmation Mr Dorey had not believed that they would get it. When I asked him why if, as he said, the application of the Side Letter was never in doubt, TCL asked for it, he thought that on reflection that was not a sensible thing to do. . Nor was it told that the Side Letter did not apply, or did not mean what TCL claimed it meant.[68]At a meeting on 7th July TCL asked for a deferment of the introduction of the One Day Bus/Tram pass and, in relation to feeder buses, referred to the Side Letter “concerning new tickets being paid as cash fares”: see paragraph 57 above.[69]On 27th July LRT decided, at an internal meeting, that the new Bus/Tram pass would be treated in the same way as the Travelcard in respect of the payout to TCL and Bus Operators.[70]On 10th August 1999 Mr Bradberry replied to Mr Kendall’s letter of 5th July. His letter dealt with several topics including Fares and Fares Compensation. He said that the cost of the feeder bus through ticket could be no more than the cost of the tram only portion of the journey, that LT Buses would expect an equitable proportion of the through ticket revenue, and that LRT proposed a separate term to be added to the compensation formula to compensate TCL for the value of the lost portion of the ticket. The proposal (contained in Schedule 3 to the letter) was that LRT would retain 50% of the fare paid on the bus; but remit 50% to TCL under the Fares Compensation Formula. So TCL were not being paid a cash fare; but they would receive the equivalent. This was later given effect by adding “Feeder Bus Tram Revenue” to Schedule 1 of OTRA and providing that that should mean 50% of Feeder Bus Revenue defined as “revenue from tickets sold on designated buses valid for single or return through journeys involving an interchange between bus and tram” and by amending the FCF.[71]He also indicated that LT had no current plans to require Bus Passes to be accepted but did intend to introduce a One Day Tram and Bus pass priced at £2.80 as soon as possible. (The One Day Bus Pass was then £2.60). He proposed a revenue apportionment on the following basis. He postulated an average use of a One-day Tram/Bus Pass on:(a) 2 longer Tramlink journeys (say 7 km each);(b) 2 shorter Tramlink journeys (say 3 km each); and(c) 2 bus feeder journeys (say 2.5km each). These would give 25 passenger kms to be paid for at about 11.2p per km, which was very close to the expected One Day Travelcard rate in January 2000, making £2.80. TCL would be paid at the one-day Travelcard rate. This would, on the assumed usage, give TCL about £2.20 per ticket.[72]The result, he suggested, would be that there would be no material revenue losses by TCL. This was because the number of tram trips made by cash fares, in the absence of the ticket (i.e. the new pass], would be 2 or 3, say 2.5 on average. At a cash fare of 90 pence that would represent £2.25. This was in effect a proposal to treat the new ticket as a Travelcard, and bring it under OTRA with a payment that would ensure that TCL was no worse off on account of the introduction of the new pass Although the body of the letter inaccurately describes the proposal as “designed to compensate TCL on a basis which is consistent with treating such passes as cash fares.” . If TCL were to receive cash fares they would get 90p x 4 i.e. £3.60.[73]His letter included the following paragraph:
“Future tickets: On the basis of the above, LT believes its revised proposals for fares compensation address TCL’s concerns over future fares policy. It is therefore LT’s intention that any future tickets introduced have settlement arrangements consistent with the form of tickets proposed. These new tickets will form part of the Tramlink Headline Fares basket A blended fare rate made up of all the different ticket types acceptable on Tramlink, used as part of the FCF. and the method of their inclusion into the calculation will be agreed with TCL”
[74]This paragraph, which was, in effect, LRT’s response to TCL’s request for confirmation of the applicability of the Side Letter, was obviously not an acceptance that TCL was entitled to receive cash fares for new tickets and passes. Nor was it a statement that made any reference to the Side Letter. The proposal that new tickets would have settlement arrangements consistent with the form of the tickets proposed was not developed in those terms. What was developed was an agreement that there would be a negotiation.[75]On 20th September 1999 Mr Johns responded to the letter of 10th August 1999. In his letter he wrote:
“In order to resolve the Fares and Fares Compensation issue we are prepared to accept a large number of your proposals, subject only to resolution of detail (which is further discussed in the Appendix to this letter). Although all of the details are important, they should not raise any issue of principle. We are concerned only to achieve an equitable solution. There are, however, five issues which still require resolution”
There are, however, five issues which still require resolution”[76]The five issues did not relate to future tickets (save for a point about the cost of upgrading the vending machines). Paragraph 1.4. of the Appendix read:
“1.4. Passes The tram/bus pass and proposed method of compensation is acceptable to TCL in principle. However, LT’s assumption that this will have no adverse effect on TCL is currently being validated by CBP Colin Buchanan & Partners (“CBP”), traffic adviser to the banks financing TCL. …”
In effect LRT’s proposal was accepted in principle.[77]In a letter of 7th October 1999 Mr Johns of TCL repeated TCL’s acceptance of the principle of a One Day Tram/Bus pass, and asked for confirmation that those tickets would form part of OTRA and that “the shortfall resulting from these discount tickets would be reimbursed to TCL in accordance with [the FCF]” This appears to be a reference to the fact that the One Day Bus/Tram Pass would reduce the Tramlink Headline Fare Rate and thus generate (potentially) payment under the FCF. .[78]On 17th December Mr Bradberry produced a schedule setting out the parties’ respective positions which included the following: Item LT Position TCL Position 5.0 Fares and Tickets 5.3. LT proposed method of reimbursement of OD One Day. Bus and Tram Passes to TCL CBP have yet to comment to TCL TCL wish to agree that reimbursement of future new tickets will be the subject of negotiation between LT and TCL[79]Further correspondence of 17th, 18th and 20th January 2000 confirmed TCL’s acceptance in principle that revenue from the Tram/Bus Pass would be apportioned in accordance with OTRA based on the proposed One Day Travelcard rate, subject to revision of that rate if the assumptions of usage underlying the latter rate proved to be inequitable on either side.[80]On 20th January 2000 LRT produced, for internal purposes, a comparison of positions which read: Item LT Position TCL Position Comment 5.0 Fares and Tickets 5.3. LT proposed method of reimbursement of OD Bus and Tram Passes to TCL Agreed (RdSC to confirm) TCL wish to agree that reimbursement of future new tickets will be the subject of negotiation between LT and TCL. Use this to overcome letter of comfort[81]On 16th February 2000 Mr Johns sent LRT a schedule of what TCL believed to be the “final position”. On 23rd February, subject to certain points of clarification, Mr Burberry agreed that to be so. Concession Agreement Agreed Position 5.0 Fares and Tickets 5.3. Tram/Bus Ticket Concession Agreement requires TCL to accept multimodal tickets introduced by LT. No specific provision on reimbursement. Method of reimbursement of One Day Bus/Tram Passes to TCL will be One Day Travelcard Rate unless proven that ODTR un-equitable. Reimbursement of future new tickets will be the subject of negotiation between LT and TCL The result[82]The result, therefore, was that in relation to the One Day Bus/Tram Pass TCL would get the Travelcard rate but future tickets would be the subject of negotiation. TCL had sought this because it did not want what it had accepted in relation to the Bus/Tram pass to be a precedent in relation to future tickets. It did want, and obtained, what Mr Johns characterized as “a right to be heard”. Mr Bradberry thought that agreeing that in future new tickets would be the subject of negotiation meant that the Side Letter would be inapplicable. Whether or not he was right about that, the result of the negotiations was obviously inconsistent with an entitlement to a cash fare in respect of the One Day Bus/Tram pass and, although less obviously, with any such entitlement in relation to other future tickets.[83]In a report to the Board of 18th February 2000, a copy of which would have been sent to the banks, and to which was attached a position paper of 16th February, Mr Johns gave details of a number of matters that had been agreed and said:
“In return we have had to concede …….. • Acceptance of a whole range of areas and ticketing proposals which we, in any case, generally regard as good sense and through which we have established a basis for negotiating reimbursement for future tickets.”
[84]Thereafter the matter was turned over to the lawyers to draft an agreement. The basic issues[85]Two basic questions arise:(a) does the second sentence of clause 23.3 of ARCA have any legal effect?(b) if so what, having regard to the Side Letter, are the considerations, if any to which the parties, and the expert, must or must not have regard? The effect of clause 23.3 of ARCA[86]In Walford v Miles [1992] 2 AC 128 the plaintiffs were prospective purchasers of a photographic processing business. The defendant sellers agreed to “terminate negotiations with any third party or consideration of any alternative with a view to concluding agreements with (the plaintiffs)” and not to deal with a third party or give further consideration to any alternative even if the first defendant received a satisfactory proposal from any third party before close of business on a certain date. It was said to be an implied term of this agreement that so long as the defendants continued to desire to sell the business the first defendant, on behalf of himself and the second defendant, would continue to negotiate in good faith with the plaintiffs.[87]The House of Lords dismissed an appeal from the Court of Appeal which, by a majority, had held that the alleged agreement was unenforceable. It did so on the basis that an agreement to negotiate lacked the necessary certainty to be enforceable, a duty to negotiate in good faith being “unworkable in practice as it is inherently inconsistent with the position of a negotiating party”. Lord Ackner, who delivered the only full speech, suggested, by reference to the decision of the United States Court of Appeal in Third Circuit in Channel Home Centers, Division of Grace Retail Corporation v Grossman [1986] 795F.2d 291, that an agreement to use best endeavours to reach an agreement did not lack the necessary certainty.[88]But in Little v Carriage Ltd [1994] 70 P & C.R. 469 Millett, LJ (as he then was) said that there was no difference between an undertaking to use best endeavours to try to agree and “an undertaking to agree, to try to agree, or to negotiate with a view to reaching agreement”, all being, in his view “equally uncertain and incapable of giving rise to an enforceable legal obligation”.[89]By comparison, in The Queensland Electricity Generating Board v New Hope Collieries Ltd[1989] 1 Lloyd’s Rep 205 the Privy Council, upholding, in this respect, the judgment of the Full Court and of the judge at first instance, considered a long term agreement for the supply of coal which stated that, in respect of purchases after the first five years, the base price and provisions for variation were to be agreed, and which contained a comprehensive arbitration clause. Sir Robin Cooke, as he then was, giving the opinion of the Board stated that, where the parties had agreed an arbitration clause in wide enough terms, the Courts would give full weight to their manifest intention to create continuing legal relations: “…..their Lordships have no doubt that here, by the agreement, the parties undertook implied primary obligations to make reasonable endeavours to agree on the terms of supply beyond the initial five-year period and, failing agreement and upon proper notice, to do everything reasonably necessary to procure the appointment of an arbitrator. Further, it is implicit in a commercial agreement of this kind that the terms of the new price structure are to be fair and reasonable as between the parties. That is the criterion or standard by which the arbitrator is to be guided”.[90]Neither party has submitted that the decision in Walford v Miles means that clause 23.3 is devoid of legal content Save that Mr Wilmot-Smith, QC, for TCL suggested that, if the Side Letter did not provide for cash fare payment, clause 23.3 might fall foul ofWalford v Miles on the basis that there was no criterion for determining what the payment should be. and, in my opinion, rightly so Not surprisingly either since, if clause 23.3. is devoid of legal content, TCL would lack any relevant private law right. . The parties did not limit their agreement to an obligation to act in good faith. They agreed(a) to act reasonably in agreeing and(b) that any failure to agree should be referred to expert determination. In those circumstances the Court can, in my judgment, decide, in the case of dispute, at least what they, and the expert, acting reasonably, are bound to take into account or ignore. An agreement such as this should not be construed to mean that the parties (or the expert) may legitimately take into account anything (however unreasonable or irrelevant) they choose, or that their contractual fate is to be determined by whatever the appointed expert happens (on whatever basis) to decide. Reasonableness is a criterion on which the Court (and the expert) can make a judgment; and, if the parties cannot agree whether it would be unreasonable to take into account, or to exclude, a particular consideration, the Court may determine the question.[91]There are, however, necessarily limitations on the Court’s power to prescribe the considerations that the parties and the expert must, or cannot, legitimately entertain. The parties’ contractual obligation is to act in good faith and reasonably. Reasonableness is a broad, and to some extent, elastic concept. What is reasonable depends in part on the point of view of the person concerned. Some considerations or proposals may be unreasonable no matter whose point of view is considered – something that no one could think reasonable. The reasonableness of others may depend on whose interests are in question, or, at the least, may be matched by considerations equally reasonable from the opposite point of view. The parties may well put forward proposals which differ without either of them thereby acting unreasonably, much less in bad faith. If the parties cannot agree, the matter must, perforce, be left to the expert for him to decide what he thinks is reasonable.[92]There is, an added complication. Reliance is placed by both parties on the Side Letter. If the letter was a legally binding document its true meaning would be determined in the light of its terms and such evidence of the circumstances in which it was executed as was admissible for the purpose of construction. Legal rules about construction of contracts cannot, however, apply to a document which was never intended to be binding as a contract.[93]The law excludes as an aid to construction of the meaning of a contract any consideration of what the parties believed it to mean Its wisdom in doing so is illustrated by the extent of the material falling to be considered in this judgment as to subjective belief. . But such beliefs, at any rate if shared, could be relevant in determining whether or not one party was acting reasonably in seeking to agree (or refuse to agree) a particular financial arrangement in respect of compensation for new tickets or passes, and as to what would be a reasonable agreement to make. The rival contentions[94]It is convenient at this point to set out the rival contentions of the parties. TCL[95]TCL contends that the Side Letter means that it is entitled, by way of compensation for the introduction of Bus Passes valid on Tramlink, to the amount of the cash fare which a passenger travelling on such a pass would have paid for his journey(s) if he had paid for a ticket in cash (“ paid for as cash fares”). I call this a “cash fare payment”. That is so whether or not the passenger using the Bus Pass would, without that pass, have made the same journey if he had to pay cash for it. TCL no longer contends that that automatically means that any reasonable agreement between the parties would have to give effect to the Side Letter. But it does contend that the Side Letter must be taken into account by the parties when seeking to agree the financial arrangements to compensate TCL in respect of new tickets, and that, in the absence of some sound countervailing consideration, reasonableness requires that effect should be given to what it says. As a public authority LBSL is bound to act reasonably and to take into account all relevant considerations, including what amounts to a policy statement of its predecessor. LBSL[96]LBSL contends that TCL is not entitled to payment on that basis for a number of reasons.[97]Firstly, LBSL submits that it can be under no legal obligation to take account of a document intended not to be legally binding. To require it to do so would be inconsistent with the contractual allocation of risk under the CA under which the risk that the Regulator would specify an additional category of tickets/passes was to be borne by TCL. Further, if the Side Letter gave rise to no legal obligation under the CA, ARCA did not invest it with a status that it previously lacked. Clause 23 of ARCA provides its own regime in relation to payment for additional tickets and passes and clause 73 of the ARCA excludes reliance on, or reference to, the Side Letter.[98]Secondly, the Side Letter does not mean what TCL say it means. It provided that TCL would be paid by one or other of the mechanisms then in place.[99]Thirdly, a cash fare payment would not compensate TCL for the introduction of new tickets/ passes. It would make TCL better off than it would have been but for their introduction, at any rate for as long as cash tickets are more expensive than other forms of ticket or pass, which is likely to be indefinitely. At present no more than 28% of customers travel on cash tickets. Some of those who take advantage of a newly applicable Bus Pass would not have made the same number of journeys if they had had to pay a cash fare for each of the journeys on which they use it. If they had to do that, some customers would not have made their Bus Pass journeys at all, or not all of them. Some would have made the same journeys (or some of them) using Travelcards. To assume that, but for the Bus Pass, all those who used it would pay the cash fare for every journey would concentrate, not dilute, the fares basket since it would place all users of the Bus Pass in the “Cash” box.[100]Fourthly, even if LBSL is bound to take the Side Letter into account, and even if that Side Letter contemplates cash fares, LBSL contends that it could properly conclude that the terms of the letter were overridden by other considerations including the fact that paying cash fares would provide TCL with an unjustified and unintended windfall.[101]LBSL proposes that TCL should be paid what is necessary to put TCL in the position it would have been if the Bus Passes had never been introduced on Tramlink and that they are under no obligation to do anything more than this. In practice what they propose is to look at the proportions of passengers that travelled on cash and Travelcards before the Bus Pass was available on the Tramlink and to calculate a blended rate to reflect the actual yield received by TCL per trip. LBSL’s calculations are that, if TCL are to receive a cash fare payment, they would receive an additional £0.569 per qualifying trip, based upon 2006 fares, leading to an increase in revenue, on the 2006 figure of 11.3 m qualifying trips, of some £6,400,000 per year These figures relate to adults. In respect of child fares TCL have argued for a blended rate which gives them more than a child cash fare. . These figures are not agreed and I make no findings as to their accuracy; but they are an indication of the possible value of the point in issue. The objective meaning of the Side Letter[102]In my view the Side Letter, objectively construed, does not, for the reasons set out in the following paragraphs, mean that TCL was to receive a cash fare payment in respect of additional tickets and passes.[103]The language of the Side Letter corresponded to what both parties knew were to be the three different ways in which TCL was to receive payment under the CA i.e.(a) by a cash fare;(b) by sharing in revenue derived from a multi modal pass purchased off tram; or(c) by sharing in the revenue derived, not from the passenger, but from some third party such as a group of local authorities financing the provision of concessions. Payment under (b) and (c) involved participation in the sharing mechanism laid down by OTRA. The Side Letter provided for TCL to be paid for additional tickets or passes in one or other of those ways .[104]Mr Wilmot Smith submitted that the letter should be regarded as dealing with(a) cash fares which were to be covered by OTRA; and(b) free tickets which were to be paid for by LT or others. I do not accept this for two reasons.[105]Firstly, OTRA did not contemplate cash payments for tickets; it contemplated a sharing of revenues derived from a pass, bought “off-tram”, covering more than one mode of transport according to a formula. A ticket could not be paid for as a cash fare and be the subject of OTRA.[106]Secondly, it seems to me tolerably clear that the methods of remuneration specified were to be viewed disjunctively. The letter as finally drafted is somewhat clumsy because of the interpolation, not in the best place, of the phrase “be introduced by LT on Tramlink and local buses at the same time”. If one leaves that out It is common ground that the introduction of the phrase was not intended to alter the meaning. the end of the paragraph reads:
“…be paid for as cash fares, be covered by the Off Tram Revenue Agreement …or if the tickets are free to users be paid for by LT or other persons”
. The natural reading of that is that the “or” governs the two alternatives which precede it.[107]In specifying in the Side Letter the three different ways in which TCL might be paid for new tickets and passes the parties must, as it seems to me, have contemplated that, other than for tickets to be paid for in cash, there would be a mode of payment which would fall within the scope of OTRA, as it then existed, or, if the tickets were free, which would come from LRT or a third party[108]It was, of course, always open to the parties to amend OTRA so as to provide that TCL would be paid a sum calculated by applying the cash fare rate to the number of journeys carried out on the tram pursuant to any new pass. When OTRA was restated it included Feeder Buses, which are cash tickets and for which, by a combination of Schedule 1 and the FCF, TCL received the equivalent of a cash fare payment. At the time of the Side Letter, however, the parties are likely to have had in mind by the words “covered by [OTRA]” that an additional ticket or pass, not being a cash ticket, purchased on the tram, would be dealt with in the same way as the passes falling within OTRA i.e. by sharing the revenue from a pass covering more than one mode of transport in accordance with the extent of its usage on each different mode. (Even the Feeder Bus tickets involve a sharing of revenue A Stored Value Ticket, which Clause 5.2 of OTRA contemplated as the subject of an amendment to OTRA, does not include a ticket which relates solely to carriage on Tramlink: see the last words of the definition (“but excludes …any stored value ticket introduced on the Tramlink System in accordance with clause 5.3”) and Clause 5.3 (“The Corporation acknowledges that the Concessionaire shall be entitled to implement arrangements for stored value ticketing which relate solely to the Tramlink System.”) ). I do not believe that the parties contemplated amending OTRA so as to provide for TCL to receive a cash fare payment. 109 If what was intended was that TCL would receive a cash fare in respect of passengers travelling on any new tickets or passes, it would have been easy to say so in clear terms. The Side Letter could just as well have omitted reference to OTRA. If that had been done (or if what has been done amounts to that) there would be very little to negotiate about and the second sentence of clause 23.3 would be practically devoid of content. 109. The argument from want of utility[111]TCL submits that, if the Comfort Letter bears the meaning ascribed to it by LBSL, namely that, in relation to new tickets or passes, TCL will be reimbursed according to the nature of the new ticket or pass, it is devoid of useful content. The CA does not say that TCL will be paid for new tickets or passes; but it could scarcely be supposed that LRT would seek to introduce new tickets or passes for which no payment would be made. If LRT introduced a new cash ticket, cash would have to be paid. If the reference in the Side Letter to payment “as cash” meant no more than that cash tickets would be paid in cash it meant nothing new. Similarly, if LRT introduced a new pass, whether concessionary or not, it was inconceivable that there would be no payment for it. In any case, if that occurred, TCL would be able to invoke clause 5.2 of OTRA. The Side Letter ought not, therefore, to be treated as limited merely to providing that TCL would get paid for new tickets and passes but as providing for what it would get, i.e. a cash fare payment. There would be a sound reason for including an assurance to that effect in a side letter. An undertaking that there would be some form of payment for new tickets could without difficulty be included in the CA, but an undertaking that there would be a cash fare payment would, if contractual, be a fetter on LRT’s discretion. TCL also suggests that, if the words “or if the tickets are free to users be paid for by LT or other persons” are there as the alternative to cash fares, they have content; but if there are three categories in all -(i) cash fares;(ii) tickets/passes covered by OTRA, and(iii) free tickets/passes, they add nothing because Concessionary fares fall under OTRA anyway.[112]Mr Heath was disposed to accept that the Side Letter did not offer more, so far as cash tickets were concerned, than what TCL was entitled to expect, and so far as passes were concerned, than what TCL was entitled to under clause 5.2. He regarded the letter as importantly stating that LRT would not introduce tickets or passes not covered by a payment mechanism in the CA (e.g. a completely free pass) and as explaining how LRT proposed to conduct itself “It wasn’t intended to do any more than describe what was going to happen”. . The CA contained no provision for payment in respect of additional tickets or passes.[113]Whilst I see the force of TCL’s argument I am not persuaded by it. I find nothing surprising in the Side Letter being an explanation of what LRT would do anyway. That would be consistent with its introduction - ““LT is able to give the following indications as to how it currently exercises its duty under the LRT Act – and the fact that several paragraphs in the Letter do that. The Letter had the advantage referred to in the second sentence of the previous paragraph.[114]I do not accept that clause 5.2 is to be interpreted as TCL suggest. That clause is concerned with changes in Off-Revenue Schemes, i.e. the arrangements described in OTRA relating to Off-Tram Revenue (i.e. Concessionary Fares Revenue and Travelcard Tram Revenue), including Stored Value Tickets and passes involving electronic pass recognition systems, to which the clause is specially directed. Whilst a Bus Pass is similar to a Travelcard it is not the same, nor identified as such.[115]Even if clause 5.2 is to be more liberally interpreted so as to apply to any new tickets and passes where the revenue was received off-tram and was to be shared with different operators, it does not seem to me to cast much light on the construction of the Side Letter; much less encourage the conclusion that the Side Letter intended to provide that TCL would receive a cash fare payment in respect of all journeys on new tickets/passes.[116]There is, moreover, no indication that clause 5.2. was in anyone’s mind in relation to the Side Letter, when that was agreed, or when ARCA was negotiated. The suggestion that it had some bearing upon the meaning of the letter surfaced only during the course of the trial. No one mentioned it in the context of compensation for new tickets and passes. I was not surprised to be told by Mr Heath that he regarded clause 5.2 as dealing with SVTs and that it did not occur to him to suggest that it provided all the assurance about being paid that TCL needed. That plainly did not occur to Mrs Boomla either.[117]Whilst it is true that concessionary permits fall within the scope of OTRA it is not surprising that the Letter should make separate reference to tickets free to users. Concessionary permits have always occupied a category of their own and are viewed as something separate from Travelcards or cash fares. Further a ticket free to users would not come within OTRA if there was nothing to share i.e. if the recipient paid nothing nor did anyone else, or if the travel involved only one mode.[118]Concerns about fettering discretion might form a reason for putting any assurance about what would be paid in a side letter, but they would also be a good reason for not giving any such assurance, by which the giver could be expected to abide, in the first place. It never crossed Mrs Boomla’s mind that LRT was agreeing to make a cash fare payment and that because any such obligation was onerous it should be put in a side letter.[119]Mr Paul Davison, the Managing Director of TCL from November 2001, suggested that the Side Letter must or should be interpreted as calling for a cash fare payment. Since it was impossible to tell what would be the “dilution of the fare box” resulting from the introduction of a new ticket or pass, the only way to avoid such dilution was for TCL to receive a cash fare payment. I do not accept this. Difficulty in measuring the impact of a new ticket or pass is a reason why TCL would want to be receive a cash fare payment. But, if TCL is to receive a cash fare payment for every journey pursuant to a Bus Pass it will be overcompensated. That is a reason why LRT would not wish to make such a payment. There is no indication in the Side Letter, or the negotiations leading up to it, that anyone proceeded on the basis that, because of the difficulty of assessing compensation, TCL should receive a cash fare payment.[120]In any event I am not persuaded that the impact of a new ticket cannot be estimated. Surveys can be, and are, used The Croydon Area Tramlink Survey (CATS) is a system designed and used by TCL and TTL who fund it to determine the number of passengers using the system, the number and type of tickets used and (inter alia) the number of journeys made on a Travelcard on the tramway. to identify the number and type of tickets used by passengers, and changes in the use of tickets/passes over time. Transport analysts can forecast the likely usage of new tickets or passes and how they will affect the use of existing tickets and passes. Surveys can check the accuracy of such forecasts and assess the pattern of use and the migration from one type of ticket or pass (or non use of the system) to a new one. I accept that such forecasts and surveys are inexact, particularly if there are multiple changes. I do not, however, accept that no sensible assessment or estimate can be made. That is, however, ultimately a matter for the expert. Mr Stephen Males, QC, for LBSL, accepts that if the expert were to conclude (as he submitted was unlikely) that the only way in which TCL could be compensated for the introduction of the Bus Pass was by it receiving a cash fare payment for each journey, so that that was the only reasonable agreement for compensation to make, he could give effect to such a conclusion.[121]In short, the meaning of the Side Letter, looking at it objectively, is not that TCL will receive a cash fare payment for all new tickets and passes or even for all new tickets and passes other than concessionary ones. On the contrary the Side Letter contemplates that TCL will be paid in one or other of the three ways in which it was to be (and is) remunerated under the CA. What that way would be would depend on the nature of the new ticket or pass and on the relevant circumstances, and, after ARCA, would be the subject of the negotiation which clause 23.3 of ARCA requires. What the parties believed at the time of the Side Letter LRT[122]I am quite satisfied that at the time of the Side Letter and the CA Mr Heath, LRT’s Project Manager, who had managed the project from the beginning and Mrs Boomla, LRT’s in-house lawyer, both of whom I found honest and satisfactory witnesses, did not believe that LRT had given any form of assurance that any new tickets/passes would be paid for as cash fares. Mrs Boomla’s position is of particular significance because she was the only one of the witnesses present at the lawyers’ meeting on 11th July 1996.[123]Mr Heath, as I infer, understood that the Letter meant that there were only three types of ticket that TCL would be obliged to accept(a) a ticket purchased from TCL by the passenger for cash i.e. a cash fare;(b) some form of Travelcard; and(c) a free pass. In the case of (b) the ticket would be paid for via OTRA, In the case of (iii) LRT or someone else, such as a local authority, would reimburse TCL. TCL would not, therefore, be obliged to accept a ticket or pass outside the payment mechanism of the CA/OTRA. He was clear in his belief as to what the Letter meant, honest enough to accept a lack of recollection as to what his interpretation was 10 years ago, but believed that his views had not changed. So do I.[124]Mrs Boomla regarded the letter as meeting TCL’s concerns that LRT might introduce new tickets or passes for which they would not be compensated under the CA “Because TCL had to accept passes and tickets they wanted to make sure that they would be paid for them and that is the point that was behind this”: Day 3/11. . Her appreciation of TCL’s concerns matches the characterization given of them by Mr Davison in a letter to TfL of 22nd October 2003 where he said:
“In our view there can be no doubt whatever that the concern which TCL wanted to have addressed was the possibility that they would, in the future, have to carry more passengers without being compensated for doing so”
[125]Equally I infer that Freshfields did not think that the Side Letter meant anything different from that which I regard as its objective meaning. It seems to me likely that Mr Elsey of AMC held a similar view. His manuscript notation – see paragraph 38 – supports that conclusion.[126]I have no evidence from Mr Hodson, the LRT director responsible for Tramlink. Mrs Boomla, who was not involved in the negotiation of ARCA, believed that when Mr Hodson signed the letter his understanding of it was the same as hers. It is clear that by 1999 Mr Hodson either believed, or accepted the view of others, that the Side Letter called for TCL to receive a cash fare payment for any new ticket or pass. I do not find it possible to make any finding as to what belief, if any, he held in 1996 as to the meaning of the relevant paragraph in the letter. TCL[127]The only witness on TCL’s side who was able to give evidence about the negotiations in 1996 was Mr Kendall. He was not present at the important lawyers’ meeting on 11th July. His evidence was that he understood the Side Letter to be saying that new tickets and passes would be paid for as if they were cash fares.[128]I do not doubt that Mr Kendall was seeking accurately to state what he believed at the time. I entertain, however, considerable doubt as to whether that was in fact his belief at the time and, if it was, it does not appear to me to have been a belief that he had good grounds for holding.[129]That that is so appears from the following part of his evidence:
“Q You did not understand this paragraph of the comfort letter as saying you would get cash in all circumstances whenever a new ticket was introduced, did you? A. The issue is that new tickets and passes could be effectively – it is within everyone’s grasp to imagine that they could be free, that such tickets and passes would be abstracted from our revenue system, our entitled revenue, and my understanding, put simply, is that such tickets and passes would be paid for as if they were cash fares. I do not think I am the only person who believed that. I think in certain aspects of Mr Bradberry’s evidence he would also, I believe, would say that he also believed that they would be paid for as cash fares Q Are you really saying that in 1996 you thought that this meant that if a new ticket was introduced you would get paid as if that had been a cash fare? A. Because it would have been abstracted directly from our cash fares in the main. Q Why would it be abstracted from your cash fares? It would be equally abstracted from other categories of fare. A. Maybe. The letter of comfort says that it will be paid for as cash fares, and I think we were looking at it as being a simple interpretation of this. MR. JUSTICE CLARKE: Where does it say that a free ticket will be paid for as cash to you? A. I do not think it – the language does not say that, my Lord. Q Well, did you think it meant that? A. I believed that it meant that, yes, my Lord. Q If the language does not say it how did you believe that it meant it? A. Because the most – we were dealing with it, with a situation where the passes and the tickets had been set out in a quite explicit way, that it was my interpretation of this language that that would be what the outcome was”
. What the parties believed at the time of the ARCA[130]It is clear that in the negotiations leading up to ARCA(a) the TCL side thought (and initially stated) that the Side Letter meant that they were entitled to receive a cash fare payment for new tickets and passes (unless free to the users). They asked for confirmation of the continued applicability of the Letter, but did not get it;(b) the LRT side thought that the Side Letter meant that TCL was so entitled; but never said so. Nor did they ever say that that was not what the Letter meant;(c) the LRT side thought that the addition of the second sentence to clause 23.3 (providing for negotiation) would supercede the provisions of the Side Letter. But no one on that side said anything to that effect. Compensation[131]I have dealt at length with what the non contractual Side Letter meant, or was thought to mean, because of the potential significance of those findings to the reasonableness of any agreement to be negotiated under clause 23.3. Of greater importance is the meaning of the parties’ contractual bargain, which was that they should agree the financial arrangements to be put in place to compensate TCL for the introduction of additional tickets and passes.[132]Compensation does not have to mean a sum paid in order to make up for a loss resulting from some act, and can simply mean remuneration (as in the expression “compensation package” in relation to employment). But the former is its more natural meaning: see Great Western Rly Co v Helps [1918] AC 144, 145 “..its natural meaning – that is to say, something that is to be paid which makes up for the loss that the man has sustained”: per Lord Dunedin. ; Skinners Co v Knight [1891] 2 QB 544, 545.[133]In the present case it is, also, its more appropriate meaning. In 1996 TCL was concerned that it might have new tickets and passes foisted upon it, for which it might not be paid, the effect of which would be to “dilute” or “erode” Two expressions used by Mr Kendall in his evidence. the revenue that it would otherwise have received, and it wanted, in that event, to be made good. The purpose of the Letter was to give TCL some comfort in that respect.[134]Moreover the CA and ARCA contain extensive provision in relation to Compensation Events by which LRT was to become bound to pay the Financial Impact Sum, being, broadly speaking, the amount by which Net Operational Revenues were less than they would have been but for the relevant Event. That is compensation in its natural meaning. “Compensate” in clause 23.3 should be interpreted as having a similar meaning.[135]Mr Kendall suggested that there was good reason for a different treatment for future tickets and passes other than SVTs (the only type of ticket within the compensation provisions) in that the introduction of the latter had been the subject of prolonged consideration whereas the former were by definition unknown. I do not, however, see why TCL should receive something more than compensation, in its natural meaning, on that account. The List of Issues[136]The parties have agreed a list of issues for the Court to decide. Several of them ask whether or not one of the parties is obliged or entitled to act in a certain way. This formulation of the issues must not obscure the fact that the principles that govern the parties’ conduct are twofold: i. the agreement that they are to seek to reach must be one which will compensate TCL for the introduction of bus passes; ii. the proposals that they put forward must not be such that in proposing them either party could be said to be acting unreasonably or in bad faith. In determining whether or not either party is obliged or entitled to act in a particular way the question is, therefore, whether, if the party acted in the manner contemplated by the question, it would be acting otherwise than in good faith or unreasonably. With that caveat I shall endeavour to answer the questions raised by the issues specified . Issue 1: In negotiating compensation to TCL for the introduction of additional tickets or passes under clause 23 of the ARCA, is LBSL obliged to take the Side Letter into account?[137]LBSL would, in my judgment, be acting unreasonably if it simply ignored the Side Letter. Although not contractually binding it was given as a form of assurance from which TCL could take some comfort. Mr Heath accepted that it was not something from which LRT would consider departing without very good reasons. ARCA is a restatement of the CA, to which the Side Letter was appurtenant. ARCA did not refer to the Side Letter; nor did the parties in the negotiations leading up to ARCA agree that the Side Letter should cease to be of any effect. Nor does clause 73 of ARCA have that consequence. Clause 73 was in identical form in the CA. It is apt to preclude the Side Letter from being treated as a collateral warranty or representation; but inapt to deprive it of all significance, at any rate as a factor, in relation to the question of reasonableness. Having said that, the interpretation that I give to the Side Letter means that there is no real conflict between its provisions and clause 23.3.[138]Accordingly I answer this question: “Yes” Issue 2: If so, does that mean that TCL is entitled to compensation equivalent to the amount which TCL would have received if the journeys made by passengers using such additional tickets and passes had been paid for in cash (“cash compensation”)?[139]The Side Letter does not mean that TCL is to be entitled to cash compensation for any additional tickets or passes. The Letter contemplates that TCL will receive payment either in the form of cash or by sharing in revenue under OTRA, as amended, or, in the case of free tickets, by payment by LRT or others. The second sentence of clause 23.3. of ARCA requires the parties to agree compensation, which is to be interpreted in the manner specified in paragraphs 132 - 3. “Cash compensation”, as defined in the issue, would, in all probability, amount to more than compensation within the meaning of clause 23. Further, nothing in the Side Letter, the negotiations for the Side Letter, or the negotiations for ARCA makes it unreasonable for LRT to decline to agree to pay cash compensation. On LRT’s side Mr Heath and Mrs Boomla believed that the Side Letter did not dictate cash compensation. Even if those on TCL’s side thought the opposite, incongruence between the respective beliefs of the parties as to the meaning of a non contractual document does not mean that it would be unreasonable for LRT to proceed on the basis of their interpretation of it, at any rate when that is its objective meaning and that meaning is consistent with the contract to which the letter relates. Nor does the fact that, in the negotiations leading up to ARCA those principally concerned on each side thought that the Side Letter called for cash compensation (but did not agree with each other that it did) make it unreasonable of LRT to decline to make cash compensation. It was not suggested that there was some form of estoppel as to the meaning of the Side Letter; and, if account is to be taken of what the parties thought in 2000, it would also be relevant to take account of what they thought in 1996 and the objective meaning of the Letter. In any event, after the initial stage the Side Letter ceased to feature in the negotiations; and the parties’ eventual agreement as to(a) how One Day Tram/Bus Passes should be paid for and(b) what should happen in relation to future tickets was not consistent with an entitlement to cash compensation. What the parties signed up to as a result of those negotiations was that they would agree compensation, which bears its natural meaning.[140]Accordingly I answer this question: “No”. Issue 3: Is LBSL entitled, in negotiating the level of compensation, to apply a principle that the introduction of additional tickets and passes should neither disadvantage nor advantage TCL, and if so how is that principle to be applied?[141]LBSL would not be acting unreasonably if it sought to apply such a principle, which would be consistent with clause 23.3 of ARCA. How exactly that principle should be applied will depend, amongst other things, on the characteristics of the ticket/pass in question, the extent of its usage, and, so far as determinable, the extent to which the introduction of the new ticket or pass will reduce, to the prejudice of TCL, what would otherwise have been the take-up of existing tickets or passes. The exact method of application of the principle is a matter for the parties to agree or for the Expert to determine.[142]Accordingly, I answer the first half of this question: “Yes”; and the second as above. Issue 4: Is LBSL entitled to refuse TCL cash compensation if payment of cash compensation would provide TCL with more money than if the additional tickets and passes had not been introduced?[143]LBSL would not be acting unreasonably if it declined to agree to make cash compensation which would put TCL in a better position than if the additional tickets and passes had not been introduced.[144]Accordingly I answer this question: “Yes”. Issue 5: Assuming, without deciding, that TCL’s revenues for each of the financial years to date have been less than envisaged in TCL’s 1996 Finance Plan in the amounts and for the reasons pleaded in paragraph 19 of the Reply, in negotiating compensation to TCL under clause 23 of the ARCA is LBSL obliged to take into account any (and if so which) of the following factors (if proved):• From 1996 to date (by LRT or TfL) the level of fares has been set in differing ways to that envisaged by the Finance Plan.• From 1996 to date LRT or TfL continued to run bus services in competition to the Tramlink System when at the date of the Concession Agreement the buses were to be removed.• From 1996 to date LRT or TfL expanded the bus services that compete with Tramlink.[145]The reasons why TCL’s revenues and patronage have, in the event, been less than it contemplated at the time that it entered into the CA (and less than those incorporated into the BCFM) are complex So would be the question as to whether and to what extent TCL should have foreseen the shortfall or the factors that led to it; and whether their forecasts of patronage (including build-up) and revenue, and several other things including inflation, were well founded. . Whether and, more pertinently, to what extent, they include the three matters identified above is not for decision now. Mr Davison’s witness statement set out a number of matters (not limited to those three) that may have had that consequence. Derived largely from an analysis by CBP. The question is whether those matters, if established, are matters that LBSL is obliged to take into account in negotiating compensation under clause 23. In my view they are not. None of them are germane to the question as to what is needed to compensate TCL for the introduction of additional tickets and passes. Clause 23 is not concerned with compensating TCL for other matters, including the three specified in the issue; nor does it provide a route to restore TCL’s fortunes to the level contemplated in the BCFM.[146]That is enough to decide the issue. But it is relevant also to observe(i) that the level of fares was a matter for LRT or the Mayor/TfL to set;(ii) that the CA and ARCA provided compensation in respect of fares by the Fares Compensation Formula, and that, insofar as that Formula was inadequate for TCL’s purposes, that was a risk that, under those agreements, TCL bore. The position with competing bus services is similar. It was a matter for LRT or the Mayor/TfL to decide what bus services to establish. Clause 44 of the CA and ARCA made provision for Compensation for Bus Related Events, which affords compensation for those passengers abstracted from tram to bus. Beyond that the risk lay with TCL.[147]Accordingly I answer this question: “No”. Issue 6: If so:a. does that mean that LBSL is obliged by clause 23 to provide TCL with cash compensation for the introduction of additional tickets or passes?b. must that be taken as negativing (completely or pro tanto) any contention on the part of LBSL that payment of cash compensation would provide TCL with more money than if the additional tickets and passes had not been introduced?[148]In the light of the answer to issue 5 these questions do not arise. If the answer to Issue 5 had been “Yes”, I do not see why it would follow that the LBSL would be bound by clause 23 to pay cash compensation; or why taking the matters in Issue 5 into consideration would negative the contention that payment of cash compensation would provide more money than if the additional tickets/passes had not been introduced. If the answer to issue 5 was “Yes”, the payment of cash consideration would still provide TCL with more money than if they had not been introduced. That extra money might counteract whatever loss of revenue TCL has suffered on account of factors such as the three mentioned in the issue. But that is a different question. Issue 7: On the true construction of the ARCA is LBSL under an obligation to negotiate compensation to TCL under clause 23 of the ARCA on any particular (and if so what) basis?[149]I do not think it possible to answer this question more helpfully than by saying that LBSL is bound to negotiate reasonably and in good faith financial arrangements in order to compensate TCL for the introduction of additional tickets and passes, i.e. to make good any loss that TCL will have suffered as a result of their introduction. In deciding how to do that LBSL and the expert may take into account anything unless it is irrelevant for that purpose, or it would be unreasonable to take it into account, and they may leave out of account anything unless it is relevant or it would be unreasonable to do so. Eligibility criteria Issue 8: Is LBSL obliged to negotiate compensation with TCL under clause 23 of the ARCA in the event of alterations to the eligibility criteria for existing tickets and passes? In particular, is LBSL under such an obligation:a. In any event?b. Or only in the event that any changes to the eligibility criteria are such as to amount to the introduction of an additional ticket or pass?[150]The Answer to this issue is (b). The obligation under clause 23 of ARCA is to agree financial arrangements to compensate TCL for the introduction of additional tickets and passes. That is something different from an alteration in the eligibility criteria for an existing ticket or pass (e.g. the period of service necessary to qualify for an LT Staff Pass).

LT Staff Passes

[151]Clause 3.2 of the CA obliged TCL to comply with the Performance Specification. Clause 1.1 of Section 10 of the Performance Specification required TCL to accept “LT Staff Passes” defined as: “.. the passes issued to Eligible Employees, their spouses, dependants and children, evidencing their eligibility for discretionary facilities primarily on rail and/or bus services operated or procured by [LRT] and, for these purposes.” “Eligible Employees” means eligible current and former staff of the Corporation and any of its current or former subsidiaries.[152]At the time of the CA Staff Passes were limited to(i) employees of LRT or one of its five subsidiaries and(ii) the staff of privatised bus companies who had previously been employees of LRT or its subsidiaries, who transferred from LRT on privatization and who were still employed on LRT connected work. Thereafter there were further privatisations of LRT functions. LRT staff that transferred on privatization were entitled to a Pass on the same basis. A number of other staff transferred from London Underground Ltd, an LRT subsidiary, to the British Transport Police and retained their LRT Staff Pass. In 1997 London River Services Ltd, a new subsidiary of LRT, took over staff previously employed by the Port of London Authority, who transferred to LRT conditions including eligibility for an LRT Staff Pass. A pass was available for an employee when he retired when he would exchange his employee pass for a retired person’s pass.[153]Similar arrangements continued after 3rd July 2000 when TfL came into operation. In July 2000 LBSL became a subsidiary of TfL and its employees became eligible for a Tfl Staff Pass. In addition TfL took over certain functions previously performed by either local or national government or the Metropolitan Police together with the staff involved such as street management and the public carriage office. These staff were offered TfL conditions which include a TfL Staff Pass. In 2003 some privatized companies took over responsibility for certain London Underground functions and London Underground Ltd staff transferring to these companies retained their TfL Staff Pass on the same basis as in paragraph 152(ii) above. Employees of Serco Docklands Ltd (the private sector operators of the Docklands Light Railway) and National Rail also became entitled to a TfL Staff Pass.[154]At the time of the CA all those eligible for a Staff Pass could nominate one person in their household (their spouse or some other person that maintained their home) to receive a Dependant Pass which was as valid as a Staff Pass. As from 1st January 2000 this arrangement was modified so that each person eligible for a Staff Pass could nominate any person aged 16 or over and residing at the same address (whether a dependant or not) to receive a Staff Nominee Pass which would be as valid as a Staff Pass.[156]As at July 2006 the number of Staff Passes that had been issued to employees was No Group Number of passes 1 Current employees of the TFL Group (including subsidiaries) 18,020 2 Current employees of Serco Docklands Ltd 464 3 Current employees of National Rail 1,607 4 Former employees of LRT that transferred to the privatised bus companies 4,157 5 Former employees of LRT/TfL who transferred to other privatised companies 2,110 6 Former employees of London Underground Ltd who transferred to the privatised companies contracted to run parts of the underground 1,486 29,268[157]TCL contends:(a) that the definition of “LT Staff Passes” does not apply in respect of any employee who was not already an eligible current or former employee as at the date of ARCA ;(b) that passes issued to TFL employees in departments not previously part of LRT or carrying out functions which were not previously part of or carried out by LRT do not fall within the definition.(c) that a Staff Pass issued to any nominee who is not the staff member’s spouse, dependant or child is an “additional ticket or pass” within clause 23.3.[158]The obligation to accept LT Staff passes is a continuing obligation which, subject to any agreed amendment, lasts for the currency of the Concession. The obligation to accept Staff Passes is, thus, an obligation to accept on each day of the period the passes of those who on that day hold a pass which falls within the definition of LT Staff Passes. In order to fall within the definition the pass holder would need to be an Eligible Employee i.e. someone who is a current or former staff member of the Corporation or one of its current or former subsidiaries. I see no reason why the definition should be construed as limited to those who were current or former staff members at the date of ARCA, as opposed to those who, on the date when the question of acceptance arises, are current or former staff members eligible for a pass. The agreement does not contain that limitation and I do not think than one is to be implied. 159 As to (b) the definitions of Staff Pass and Eligible Employee are not linked to the functions carried out by LRT or any successor to it. Those functions, as TCL appreciated, were liable to change over the period of the concession. At the date of ARCA it was well known to the parties that parts of LRT’s functions would be transferred to LBSL within days and that TfL would have additional functions such as street management: see GLAA, section 259. In those circumstances there is no reason to regard a change of LRT or TfL function as meaning that a pass for an employee engaged in carrying out those functions is an additional pass within clause 23.[160]But LT Staff Passes are limited to “eligible current and former staff of [LRT] and any of its current and former subsidiaries”. That definition does not, as a matter of language, extend to those who, when the pass comes to be honoured, are not and never have been staff of LRT or any of its then current or former subsidiaries. Nor do I regard it as justifiable to imply such an extension. The obligation to accept those with staff passes for free imposes financial burdens on TCL. They should not be extended without clear words. Issue 9(a): Does the grant of LT Staff Passes to employees who were not already current or former employees as at the date of the ARCA amount to the introduction of “additional tickets or passes” such that TCL is entitled to compensation under clause 23 of the ARCA? Issue 9(b): Does the grant of LT Staff Passes to those employed in departments not previously part of LRT or carrying out functions which were not previously part of or carried out by LRT amount to the introduction of “additional tickets or passes” such that TCL is entitled to compensation under clause 23 of the ARCA?[161]I answer both questions: No. Neither of these issues deal with the issue raised in paragraph 160. Issue 9(c): Does the grant of LT Staff Passes to same sex partners of employees amount to the introduction of “additional tickets or passes” such that TCL is entitled to compensation under clause 23 of the ARCA?[162]The question arises because the change of arrangements for nominee passes was made, at least in part, in order to avoid TfL having to make inquiries into the nature of the relationships between staff members and their nominees, some of whom will be partners of the same sex. LBSL contended that the reference in the definition of Staff Passes to “spouses or dependants” should be construed as meaning that a same sex partner or any nominated family member residing at the same address should be regarded as within the definition of spouse or dependant in the Performance Specification.[163]There are two different questions. The first is whether a same sex partner should be treated as coming within the definition of “spouse”. Whether or not that is so, Mr Wilmot-Smith made it clear in his final speech that TCL are prepared to accept that “spouse” should be treated as extending to a same sex partner.[164]In the light of that stance, the answer to the issue is “No”.[165]The second question, which this issue does not raise, is whether TCL are bound to honour a Staff Pass issued to someone who is not either an Eligible Employee or a spouse (including therein a same sex partner) or a dependant. As matters stand TCL are being required to accept a pass issued to someone nominated by a person eligible for a Staff Pass who is aged 16 or over and residing at the same address.[166]In my judgment this is a departure from what was agreed in the Performance Specification where the definition of Staff Passes only extends to those issued to persons who are Eligible Employees, their spouses or dependants. A Staff Nominee Pass issued to someone who is not such a person must be treated as an additional pass.

Police Passes

[167]Clause 2.2. of the Performance Specification also obliges TCL to accept Police Passes, defined as “the passes, identification card or warrant card issued to any constable of any of Her Majesty’s Police Forces.”[168]The issue is whether the grant of free travel to members of the Kent Constabulary and to special constables amount to the introduction of “additional ticket or passes”. TCL contends that, because the arrangements in place at the time of the CA and ARCA did not extend to providing free travel to members of the Kent Constabulary or special constables, LBSL’s instructions that such constables should be carried without charge amounts to an additional ticket or pass.[169]I do not agree. A pass “set out in the Performance Specification” is not “an additional ticket or pass”. Members of the Kent Constabulary and special constables are alike constables of Her Majesty’s Police Forces, and their warrant card therefore constitutes a Police Pass, which is a pass set out in the Performance Specification. Issue 9(d): Does the grant of free travel to members of the Kent Constabulary amount to the introduction of “additional tickets or passes” such that TCL is entitled to compensation under clause 23 of the ARCA? Issue 9(e): Does the grant of free travel to special constables amount to the introduction of “additional tickets or passes” such that TCL is entitled to compensation under clause 23 of the ARCA?[170]The answer to both questions is “No”.[171]Issue 9 (f) is no longer a live issue since LBSL accept that tickets or passes for Community Support Officers are additional tickets. Issue 10: Is TCL entitled to any (and if so which) of the declarations claimed?[172]TCL seek in their Particulars of Claim four different declarations. Subject to any further argument in the light of this judgment, I am minded, if requested, to make the following declarations:(a) Declaration No 2;(b) Declaration 4.a.ii;(c) Declaration 4.c (but without the words from “or altered….” to the end); and(d) Declaration 4.d. (iii) (but without the words “nor by the revisions…” to the end); together with a declaration to give effect to my conclusion in relation to Staff Nominee Passes and in paragraph 161. I invite the parties to consider the extent to which, in the light of this judgment, any declaration is necessary.

Cited in 2 later judgments